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Why Brocade Communications Systems, Inc. Stock Jumped 36.3% in 2016

By Steve Symington - Jan 10, 2017 at 8:00AM

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The networking company agreed to be acquired late last year. Here's what investors need to know.

IMAGE SOURCE: BROCADE COMMUNICATIONS SYSTEMS.

What happened

Shares of Brocade Communications Systems (BRCD) skyrocketed 36.3% in 2016, according to data provided by S&P Global Market Intelligence, after the networking solutions company agreed to be acquired by analog and digital semiconductor specialist Broadcom (AVGO -1.07%).

So what

More specifically on Wednesday, Nov. 2 2016, Broadcom and Brocade announced a definitive agreement under which Broadcom will acquire Brocade for $12.75 per share in cash. That values Brocade at roughly $5.9 billion, including $400 million of net debt, and represented a 47% premium to its unaffected closing price the previous Friday -- that was before Bloomberg initially sent shares of Brocade soaring 21% by breaking the news that its impending sale was in the final stages in advance of the formal announcement.

Now what

"Our best-in-class FC SAN soluctions will help Broadcom create one of the industry's broadest portfolios for enterprise storage," stated Brocade CEO Lloyd Carney at the time. "We will work with Broadcom as it seeks to find a buyer for our IP Networking business which includes a full portfolio of open, hardware and software-based solutions spanning the core of the data center to the network edge."

The deal has already been unanimously approved by both companies' boards, and is expected to close in the second half of Broadcom's fiscal year 2017, which began at the end of October 2016, pending regulatory and shareholder approval. But with shares of Brocade currently trading less than 2% below the agreed all-cash acquisition price -- and unless waiting longer to sell might result in more favorable long-term capital gains tax treatment -- I think investors would be wise to take their profits and put them to work elsewhere.

Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Brocade Communications Systems, Inc. Stock Quote
Brocade Communications Systems, Inc.
BRCD
Broadcom Limited Stock Quote
Broadcom Limited
AVGO
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